E&Y ITEM Club Says U.K. Back in Recession

By Jennifer Ryan -
Jan 15, 2012

Ernst & Young LLP’s ITEM Club said
the U.K. economy has slipped back into a recession and the Bank
of England will increase its bond-purchase target in February to
counter the sovereign debt crisis in Europe.

The economy will probably shrink in the current quarter
after contracting in the last three months of 2011, the research
group said in a report in London today. It also cut its 2012
growth forecast to 0.2 percent from 1.5 percent. In a separate
report, manufacturers’ group EEF forecast 1 percent expansion
this year.

Some Bank of England policy makers have said more stimulus
may be needed as Europe’s debt crisis and budget cuts by
Britain’s government restrain growth. Citigroup Inc. and Royal
Bank of Scotland Group Plc are among banks forecasting an
additional loosening of policy next month.

Data “are likely to show that we are back in recession and
we are going to have to wait until this summer before there are
any signs of improvement,” Peter Spencer, chief economic
adviser to the ITEM Club, said. “However, the longer the
uncertainty continues, the more debilitating the impact will be
on the U.K.’s economic prospects.”

ITEM Club forecasts that economic growth will accelerate to
1.8 percent next year and 2.8 percent in 2014. As well as
raising the ceiling of its asset-purchase plan, currently at 275
billion pounds ($421 billion), the Bank of England will hold its
benchmark interest rate at a record low of 0.5 percent until the
first half of 2013, the group said.

ITEM Club said its predictions assume the turmoil in Europe,
the U.K.’s biggest trading partner, is “successfully
negotiated.” Standard & Poor’s cut the ratings of nine euro-
area sovereigns, including France, on Jan. 13, citing
“insufficient” policy steps to combat the debt crisis. Germany
was left with the region’s only stable AAA rating.

The EEF said in its report that the “most dominant risk”
to the economy this year is the debt crisis in Europe. Still, it
expects expansion “to be underpinned by growth in net trade and
investment, against a backdrop of weak consumer and government
spending.” It sees growth accelerating to 2.6 percent in 2013.